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Jan Hatzius and Sven Jari Stehn of Goldman Sachs: The Case for a Nominal GDP Target

The conclusion to their October 14, 2011 "U.S. Economics Analyst":

Not a Panacea, But Probably the Best Option:

Under our forecast of high (and gradually rising) unemployment coupled with renewed disinflation, further monetary policy easing would be appropriate. We believe that a nominal GDP level target paired with additional large-scale asset purchases would be a good framework to deliver such easing. Asset purchases enhance the credibility of the shift in the target, and the shift in the target raises the likelihood that the asset purchases will be effective. The whole is greater than the sum of the parts. The case for such a policy would strengthen further if inflation fell sharply and the risk of deflation reappeared clearly on the radar screen.

The credibility of the policy could be strengthened further via a broadening of the assets to be purchased and/or renewed fiscal expansion. But these policies would probably require the explicit cooperation of Congress, which seems unlikely for the foreseeable future. Thus, we believe that the Fed’s most promising option for delivering significant further policy easing would be a shift to a nominal GDP level target coupled with large-scale asset purchases.

They hope such a policy could lower the unemployment rate by two full percentage points--from 8.5% to 6.5%--as of mid-2013.

The whole purpose of an independent central bank is so that it can do the right thing with respect to its dual mandate, and nominal GDP level targeting plus quantitative easing now looks to be the right thing to do.

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